Many financial advisors look for opportunities to win the 401(k) business of local employers because it both provides them with some immediate revenue and, more important, steers cross-selling business their way as employees get to know them and turn to them for financial advice -- especially as they retire and bring them their rolled-over assets to invest.

Now a somewhat ambiguous recent study by the Employee Benefit Research Institute (EBRI) raises the question of whether it is better for these advisors to encourage employers to automatically enroll their employees in a savings plan or to have them let employees decide on their own whether to participate and how much to contribute.

The EBRI study clearly showed that when a plan adopted an auto-enrollment policy that required employees to opt out if they did not want to save on a regular basis, there was greater participation by employees in the plan than if participation was purely voluntarily.   

But the EBRI study also found that there were adverse side effects to making participation automatic.

It turns out that if a company automatically enrolled all employees who didn’t opt out of the program so that 3% of wages would automatically be withheld from pay and invested in a 401(k) plan, some who would have voluntarily signed up and opted to save at a higher rate -- say 5% or 6% of pay -- would end up just going with the much smaller automatic enrollment amount.

EBRI argues that such a negative effect on some savers is okay, because the net impact of inducing more people to save who otherwise would not have voluntarily signed up at all is greater -- both monetarily and in social terms -- than the reduction in savings from those who might otherwise have invested more of their earnings in a plan.

It’s not clear that this is automatically true, though.

The study found that people who tend to put more money into a savings program on their own tend to be those earning higher incomes. So if a company has a greater proportion of higher-income workers, a voluntary plan might result in more money being saved in total than would an automatic enrollment plan.

Mercer Bullard, an associate professor of law at the University of Mississippi School of Law, who has examined this issue, told Financial Planning he thinks the best approach for advisors might be to recommend automatic enrollment, but then to get actively involved in following up with employees “to encourage higher participation percentages.” 

“Auto-enroll would mean more business under the plan -- probably more assets, definitely more participants -- and more potential cross-selling clients as well,” Bullard said.  

He added that low 401(k) contribution rates by higher income employees may also be less of a problem that it appears for advisors since “high income participants may simply opt to save the extra money outside of the plan.”